Aziyo Biologics, Inc. (NASDAQ:AZYO) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Good day, ladies and gentlemen. Welcome to the Aziyo Biologics First Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please be advised that today’s conference call is being recorded. I would now like to hand the conference call over to Matt Steinberg, Finn Partners.

Matt Steinberg: Thank you, operator, and thank you all for participating in today’s call. Earlier today, Aziyo released financial results for the quarter ended March 31, 2023. A copy of the press release is available on the company’s website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that do not relate to matters of historical facts or relate to expectations or predictions of future events, results or performance are forward-looking statements.

All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our public filings with the SEC, including Aziyo’s annual report on Form 10-Q for the quarter ended March 31, 2023, to be filed with the SEC, accessible on the SEC’s website at www.sec.gov.

Such factors may be updated from time to time in Aziyo’s other filings with the SEC. The conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 10, 2023. Aziyo Biologics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. Also, during this presentation, we refer to gross margin, excluding intangible asset amortization, which is a non-GAAP financial measure. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure is available in the company’s financial results release for the first quarter ended March 31, 2023, which is accessible on the SEC’s website and posted on the Investor page of the Aziyo website at www.aziyo.com.

And with that, I will turn the call over to Aziyo’s CEO, Randy Mills.

Randy Mills: Thank you, Matt. Welcome to our first quarter 2023 earnings call. Today, I’ll start with an overview of recent highlights. I will then describe how our efforts fit into the overall strategy for Aziyo. Matt Ferguson, our CFO, will provide details and context for our financial results. And lastly, I’ll wrap up with the priorities for the company moving forward. After that, we will open the line for your questions. We have a lot of ground to cover, so let’s jump in. First, it would be hard to miss the exceptional financial performance delivered by our businesses. Sales were up 14% to a record $13.1 million for the quarter, and this top line growth was seen across all of our four businesses. Furthermore, we saw a substantial improvement in gross margin, up 11 points year-over-year to 49%.

The improvement in gross margin is largely attributed to process improvements made by our operations team, led by Erica Elchin. Recall, Erica was one of the leadership changes that we made in the second half of last year. And the efforts of her and her team are starting to produce some really impressive results. Next up, we made great progress on the business development front, which included creating a partnership with LeMaitre Vascular to distribute our cardiovascular portfolio. With this deal, we gained access to LeMaitre’s expert 58-person sales team dedicated to the needs of the cardiovascular surgeon, increasing coverage approximately fivefold. Similarly, we are now operationalizing our nonexclusive distribution partnership with Sientra, a leader in breast reconstruction surgery for our best-in-class product SimpliDerm.

Like with LeMaitre, this partnership greatly expands sales coverage for SimpliDerm with the addition of Sientra’s 55 sales professionals, again, approximately a fivefold increase over our current coverage. These transactions enable us to improve patient access and outcome and at the same time, they increase our commercial footprint in a capital-efficient manner. Lastly, we’ve made progress with FDA. Following the receipt of our NSE letter for CanGaroo RM, we were granted a meeting with the review teams from both the Center for Devices and the Center for Drugs as CanGaroo RM is regulated as a combination product at FDA. The meeting was productive, with the results being a clear understanding of the additional information requested by the agency for the resubmission of CanGaroo RM’s 510(k).

The request is limited to in vitro quality control testing and importantly, does not require the generation of any animal or human data. Our R&D teams are laser-focused on generating this information and are confident we will be able to provide the agency with the required information. Now let’s put this strong performance into the context of our overall strategy for Aziyo. At Aziyo, our mission is to humanize medical devices for better patient outcomes. We believe that a very practical application of regenerative medicine is improving the interface between the medically essential device and the patient that it’s intended to treat. Complications that arise at the device patient interface, whether it be from movement, or erosion, or fibrosis, or infection, is an enormous problem and also represents a massive opportunity.

When you just look at the surgical procedures that CanGaroo and SimpliDerm address, each year, there are over 90,000 complications so severe that they require surgical re-intervention and it cost the health care system of $7.5 billion. That’s not to mention the very real morbidity and mortality that the patient and their family experience. Now here is what we think is really exciting. We’re developing technology that combines the proven benefits of a biologically-based material with therapeutic delivery to create the drug-eluting biologic. The combination of these two can produce synergistic effects. And that’s because there are so many therapeutically relevant drugs that are also highly protein bound, keeping them at the site and active much longer than you would get with simple drug elution.

And we saw this effect rather dramatically in our preclinical studies for CanGaroo RM. Weeks after the drug elution was complete, the biologic pouch still has the ability to kill a 6-log challenge of pathogenic bacteria. So we’re starting with relatively simple therapeutics here, like antibiotics with CanGaroo RM, but we really think that’s just the tip of the iceberg. So now let’s look at how we’re putting this technology to work across our different businesses. Aziyo is organized into four business units according to the markets served. These are CanGaroo, which is an envelope technology used primarily with pacemaker implantation today, but it also has indications in neurostimulation and the like. SimpliDerm, our acellular dermis technology, which is used in breast reconstruction.

Cardiovascular, which leverages porcine-derived extracellular matrix for cardiac and vascular surgery; and then lastly, orthobiologics, our allograft business that’s focused on spine and orthopedics surgery. Our CanGaroo and SimpliDerm businesses are and we believe will continue to be high-growth opportunities for us. They are also two product lines that best leverage our drug eluting technology moving forward. Focusing on CanGaroo for a minute, we saw very healthy top line and gross margin improvements. This is a product that we distribute through two channels. One is through a proprietary sales force and the other is through our distribution partner, Boston Scientific. CanGaroo has tremendous value, both with and without antibiotic supplementation.

There has been some great clinical work published that shows the benefit of CanGaroo, particularly in the subcutaneous defibrillator placement, where migration and fibrosis are a real threat to efficacy. There is a new paper out in JACC, the Journal of the American College of Cardiology, demonstrating this effect. Look for it. We also have some exciting data being presented at the upcoming Annual Heart Rhythm Society Meeting in New Orleans. We will be there from May 19 to the 21 at booth 319. If you is there, stop by. We would love to see you. And again, all of this great activity is on our currently marketed version of CanGaroo without antibiotics. But as mentioned in the opening, we are preparing for the resubmission of CanGaroo RM, our pouch product that elutes the antibiotics rifampin and minocycline.

I know the question that everyone wants to know, when will we be ready to resubmit to FDA? What I can tell you now is that we are confident we can produce a high-quality submission. And two, it will be filed within the calendar year. We will provide further updates as we gain more specificity. Now moving to SimpliDerm. Here, we saw top line growth of 40%. Surgeons love this product. We sell SimpliDerm through our own distributor network. And as recently announced, we have added breast implant manufacturer, Sientra, as a partner. And this makes a lot of sense for both organizations as breast implant surgery frequently requires the use of an acellular dermal product. We also saw a very nice increase in gross margin on SimpliDerm, resulting from process improvements in manufacturing.

Cost of goods reduction on SimpliDerm is an important goal for us, and we believe these improvements, along with volume increases we expect to see with the Sientra partnership, will increase the profitability of this line substantially. On the other side of the house, we have our more mature businesses in terms of revenue growth potential, but which are still great cash producers for the organization. These are our cardiovascular and orthobiologics businesses. And yet, even here, we saw a solid growth this quarter. Our cardiovascular business was up 12%, and our new partnership with LeMaitre will open up our product representation significantly, adding 58 direct sales reps to our current coverage. In this new model, we sell product to LeMaitre in bulk at a transfer price that is approximately about half of what we’re recognizing in the end market.

Now despite that, going forward, we estimate that we will realize a gross margin of approximately 60% on what should be much higher volumes and again, with virtually no selling cost. Therefore, as with our other strategic moves, we expect that this partnership will improve our profitability and our cash flow. Our final business unit is orthobiologics. It is our largest in terms of revenue. And here, we’ve made remarkable progress under new leadership. For the period, sales grew 7% to $6.7 million, and gross margin improved 14 points. These improvements are driven by strong demand for the product and by process improvements the team has implemented along the way, both of which we think are likely to continue. So all in all, a very strong quarter.

With that, I’ll stop talking and turn it over to Matt to give us some financial highlights.

Matt Ferguson: Okay. Thanks, Randy. We are very pleased with our first quarter results, highlighted by record net sales and gross profit. As Randy mentioned, we achieved 14% growth for the first quarter of 2023, net sales of $13.1 million. The increase was driven by growth across all four business segments, led by our SimpliDerm and CanGaroo product lines. Gross profit for the first quarter of 2023 was $6.3 million, resulting in a gross margin of 49%, up 11 percentage points compared to the prior year period. On a non-GAAP basis, excluding amortization of intangibles, which may be viewed as more indicative of our operating performance, gross margin grew to 55%, up from 45% in the first quarter of 2022. We saw operational gains at both of our manufacturing sites, with the greatest impact coming from our orthobiologics and women’s health business units.

Total operating expenses were $12.7 million for the first quarter of 2023 compared to $11.2 million in the corresponding prior year period. The increase was primarily due to increased non-cash accruals related to the 2021 recall of our FiberCel product. With the gains in gross profit and the somewhat higher operating expenses in the quarter, our Q1 net loss was only slightly changed from the prior year period, coming in at $8.0 million for Q1 of this year compared to $8.1 million in the year ago quarter. As of March 31, 2023, our cash position was $11.8 million. This reflects cash usage of $5.2 million for the quarter. Based on a variety of factors, the partnerships we’ve implemented, continued organic growth and a variety of other efficiency measures we’ve implemented, we expect this burn rate to come down significantly during the remainder of the year.

We will see some effect in Q2, and by the second half of the year, we expect cash burn to be at roughly half of recent levels. In other words, in the range of $2 million to $3 million per quarter for Q3 and Q4 of this year. I’d also like to remind everyone that we’re fortunate to have a committed base of shareholders, chief among them, HighCape Partners, who is one of the founders of the company and continues to be our largest shareholder. We very much appreciate that HighCape remains actively involved in the company and committed to our long-term success and increasing shareholder value. And with that, I’ll hand it back to Randy before we take questions.

Randy Mills: Thank you, Matt. I’d like to finish up with a summary of our priorities moving ahead. First, we are continuing to drive top line growth, particularly in our CanGaroo and SimpliDerm lines. To this end, we are strengthening our partnership with Boston Scientific by building awareness around the unique synergies CanGaroo offers Boston CRM products, specifically their subcutaneous defibrillator. With SimpliDerm, we are continuing to drive sales through our own distribution network and are working aggressively with Sientra to get their sales team up and running. We are also doing the same with LeMaitre, looking to set a strong trajectory out of the gate for our cardiovascular products. Our second point of focus is improving cash flow.

We want the cost of goods improvements we have made to stick and to serve as a base for even better margins going forward. As Matt pointed out, we are doing a nice job reducing operating expense and are targeting to have our cash burn rate cut in half in the second part of the year. And we’re still not done with business development activities. We’ve had some solid wins already this year, but we look forward to capitalizing on additional opportunities, specifically around our orthobiologics and CanGaroo businesses, which could further improve our cash position. And our third point of focus is the resubmission of CanGaroo RM. Our regulatory and R&D teams, led by Dr. Michelle Williams, are hard at work generating the data the agency needs for resubmission.

And we look forward to providing you with updates as our progress unfolds. So we kicked off 2023 in a really positive note by generating record revenue and gross margin performance, and our four business segments are hitting on all four cylinders. I’d like to point out that none of this would be possible without the tireless work of our dedicated team. And I want to end by thanking all of the employees as well as the patients and the stakeholders for their continued support. So with that, I’d like to end the comments and open the lineup for questions.

Operator: [Operator Instructions] And it looks like we have a question from Ross Osborn from Cantor. Your line is open.

Operator: And that was our last question. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. You may now disconnect your lines at this time, and have a great day.